The Department of Housing and Urban Development’s FHA loan programs are one of three government-backed residential loan programs, and the FHA 203(k) loan is one of their specialty programs. For first time home buyers, the FHA loan is a popular choice due to the low down payment and easier qualifying. But the FHA 203(k) is a loan specifically designed to acquire and rehabilitate existing real estate. The “(k)” refers to the specific section where the program guidelines can be found.
How the FHA 203(k) Loan Works
First, it’s important to understand that the FHA doesn’t actually approve the loan or issue the funds. Just like the other two government-backed loans, individual lenders approved by the FHA are the ones who originate, process and fund an FHA loan, including the 203(k) program. The FHA 203(k) loan is a program where funds are issued to finance both the purchase as well as the renovation of a home all in one loan program.
With a traditional mortgage, a property can be in such poor condition that a bank or mortgage company simply won’t make a loan. The lender’s collateral doesn’t meet the standards. Yet the 203(k) loan can be used to buy such a property to acquire and repair identified issues. Such issues can be cosmetic in nature or they can be necessary structural needs. The lender will approve the application, finance the purchase as well as hold back the amount of funds needed to make the repairs in an escrow account.
Understanding the Steps
There are licensed 203(k) Consultants who need to be identified and work with at the very beginning. Along with the consultant and a contractor, a final value will be estimated based upon the needed repairs having been completed. At this stage, a Specification of Repairs, or SOR will be completed and included in the loan file. Once the property is under contract, the repair work must begin within 30 days.
At this stage, the 203(k) loan works very much like a traditional construction loan. The construction funds aren’t released to the contractor all at once but in stages as the work progresses. At various stages, the lender can order an inspection to verify the work is being completed. Once the contractor has completed the work and a Certificate of Completion is provided, the remaining funds will be released to the contractor and the loan is officially close. Note that some lender may have different “draw” schedules as to how and when repair funds are disbursed but in general this is the process.
An Experienced Mortgage Lender can be the Difference
The 203(k) loan, while it’s part of the FHA family, is not as common as the standard FHA loan used to buy and finance a primary residence. Lenders like us who do offer the 203(k) loan have the experience necessary to fund and monitor the program. Because of the expertise and experience required with the FHA 203(k) loan program, it’s critically important to work with a lender experienced with this program. If you apply for a 203(k) loan with an FHA lender who doesn’t have the experience needed, you might very well be in for a rough time. 203(k) loans aren’t difficult, but working with an experienced 203(k) lender is a must. If you have any questions or need a second opinion on your FHA 203K loans, reach out to me. I’ll gladly help.